Foreclosures Benefit a Neighborhood, Not Hurt It

Many articles, papers, and opinion pieces have been written about the detrimental effects that foreclosures can have on a neighborhood. For example, foreclosures in your neighborhood allegedly lower home values, increase crime, and make refinancing harder for homeowners who live nearby. While these studies and stories may be technically accurate, their focus is too narrow to provide a complete picture of what foreclosures mean for a neighborhood in the medium to long term.

All of these claims focus on the just-foreclosed home—an empty, run-down shell with an overgrown lawn, missing appliances, and disconnected utilities. But the fact that a home was foreclosed at one point in time doesn’t mean that it will remain vacant and derelict forever. In fact, I contend that foreclosures benefit a neighborhood, and areas that have experienced the most foreclosures are poised to improve the fastest during a recovery.

Before I get into the benefits of foreclosure for a neighborhood, I want to be clear that the personal experience of foreclosure is not positive. Going through a foreclosure is disheartening, and losing your home takes an emotional toll, no matter the circumstances. I have a handful of friends who have been through foreclosure. It was not something any of them enjoyed, and I would not personally wish the experience on anyone.

At the national level, consider the markets that were the hardest-hit by foreclosures after the bubble burst. Las Vegas and Phoenix were both overwhelmed with foreclosures a few years ago, and yet today they are experiencing some of the largest price gains in the nation—15% and 23% year-over-year as of the latest data from Case-Shiller.

Just in the handful of blocks around my home there have been at least half a dozen foreclosures in the last few years. Instead of becoming worse with each new foreclosure, the overall character of the neighborhood has been noticeably improved through these foreclosures.

Some foreclosures are purchased, fixed up, and lived in by the family that bought from the bank. Some are bought by flippers, dramatically refurbished (often after being gutted to the studs), and sold for a decent profit. Others have been bought, fixed up, and are now rentals. In every case, within a year of being repossessed by the bank each the foreclosed homes in my neighborhood has become nicer, as evidenced by the photos throughout this post.

Homes that—even before foreclosure—were the most run-down and neglected in the neighborhood have often become the nicest home on the block. Former homeowners who could not afford even the most basic maintenance have moved on to more affordable rentals, replaced by investors and families who have both the resources and the motivation to keep these homes looking nice.

Here’s a quick rundown of what’s happened with a few of the foreclosures near my home. The homes listed below appear in the same order as their photos in this post.

3431 Oakes: Purchased by a family. Since foreclosure they have refurbished the interior, added a railing to the front porch, put in a nice fence, and cleaned up the yard.

3609 Wetmore: A small investment group that has fixed and flipped a number of homes in Everett bought this home. After their high quality work was complete, the home sold to the new owner for over double what they paid.

3331 Wetmore: Totally gutted, remodeled, and refinished over the course of nine months. Major work includes a whole new front porch, all new windows and doors, a new back porch, and an all new interior. Currently on the market.

3616 Rockefeller: The family that bought this home built a matching garage with second floor living space on the back of the lot (not seen in the photo) and is completely renovating the main house.

1710 36th: Purchased by a small investor, totally gutted and refurbished with new windows, doors, insulation, floors, all-new kitchen, etc. The finish work was nice enough that he was able to charge above-market rent.

The house directly across the street from mine was foreclosed in January. Rather than causing me concern about the detrimental effect that this will have on the “value” of my home or worrying about how the neighborhood is going downhill, instead I am excited to see how the home will be improved by its eventual new owners.

Foreclosures are not the dark cloud over neighborhoods that they are claimed to be. On the contrary, they are the leading edge of positive changes that improve the character of a neighborhood and lay the groundwork for a sustainable recovery.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

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30 comments:

Excellent post. Foreclosures, unfortunate as they are for the owners, serve a valuable purpose in a free market. As the post points out, if the owner cannot afford the mortgage payments, the owner certainly cannot maintain upkeep.

Nice trick with different lighting. Pre-foreclosure photos has cloudy light but the post-foreclosure were made is a perfect sunlight. I like such deception. It’s also popular with people when they don’t smile before and they do smile after.

The foreclosure has some effect on the neighborhood but it would be better to put more comparable photos.

The Tim: What you’re pointing out, at the local level, is the difference between Iceland and Greece (at the national level – in the former case, going through “foreclosure” and in the latter case, being bailed out / foreclosure forgiveness and still suffering the debts). To use a metaphor, in a ecosystem, its the difference between “let it burn / fire is healthy in the long term” and “out by noon / all fire is bad” mentality. Fire destroys, but it also renews by freeing nutrients trapped in dead material, clearing out undergrowth, and stimulating certain plants to drop seeds, opens up the canopy to allow light in, etc.

As you show, the creative destruction of foreclosure is working to free up zombie / trapped assets for productive uses. In addition, as cruddy as it is for the individuals to suffer through, foreclosure takes that weight off their shoulders, relieves them of the debts and continuing call on their income, so that in the longer term, they’re able to reset the housing expense part of their finances to a more sustainable level. Sucks to be someone being foreclosed on now, ask ’em how it is in 5 years to be free of the albatross.

Clearly, as Las Vegas, Phoenix, et al show, the better way to get to a real, un-manipulated market is to foreclose, foreclose and foreclose some more – don’t dilly dally, just get it over with. Sell ’em off by the bushel and let the chips fall where they may. The sharp knife cuts the quickest and hurts the least. Give the band-aid a quick, sharp pull, instead of a long drawn out slow removal.

The next macro step that needs to happen in this process is for the Fed to quit artificially holding down interest rates. That’s fundamentally the root of this last housing boom and bust and the current boomlet. Until money / capital is priced right (e.g by earning a real risk adjusted return), the mal-investment will continue. The last boom was clearly mal-investment in housing stock (e.g. McMansions by the thousands in the middle of nowhere, condos by the bushel in Puyallup, etc) – the bust that followed was entirely predictable.

The bust that will happen when the Fed either wakes up to reality or is forced to, nay, loses control of interest rates will be ugly. It’ll look like the Yellowstone fires – everything was fine, right up until it wasn’t when that lightning bolt hit. But then again, we reap what we sow. The Yellowstone fires were the result of decades of fire suppression, leading to a build up of fuels that made a catastrophic firestorm inevitable. The economic turmoil that will happen when interest rates are forced up will be similar as there is so much bad debt and mal-investment in the economy it isn’t funny. And that’s when there will be metaphoric blood in the street and it’ll be time to buy for those who have their finances in order (e.g. out of debt, living well below their means, with a strong work ethic and diverse skill set and multiple streams of income) and resources salted away.

Nice trick with different lighting. Pre-foreclosure photos has cloudy light but the post-foreclosure were made is a perfect sunlight. I like such deception.

It’s not an intentional deception. I just used the original listing photos for the “foreclosure” photos, and went out myself a week or two ago to take my own shots for the “today” photos (which are completely un-doctored). The fact that all of the “foreclosure” photos I took from the listings happened to be taken on cloudy days is a coincidence.

I’ll add two caveats though – this is a phenomenon most apparent in older neighborhoods where the homes are still worth fixing. Foreclosures in newer neighborhoods aren’t as likely to turn into the nicest house on the block as they are to accelerate the depreciation of the other newer homes nearby. Sometimes these cheap newer homes are the gateway for riff-raff to move in.

Personal anecdote – I went to look at a used car being sold in a newer “million dollar plus” neighborhood. Much to my surprise the guy had recently bought the place as a foreclosure for half off, and set up small car dealership in the home. He had used cars parked all up and down the streets of this former luxury community. I can’t imagine the neighbors looked at this as any kind of improvement.

Great post, The Tim. I have seen a similar trend in my neighborhood, and with the exception of properties being renovated to become rentals, would agree with the point of the post. Nothing against older folks, but you can point to the 3 houses on my street which are in the most degraded condition – peeling paint, aluminum foil taped inside the windows, junk on the back porch, weeds 2 feet high . . . you get the idea, and you will find each is owned by a widow or very old couple. Long since paid off, the houses have no mortgage payments and as long as the owner can pay property taxes, they will live in that home until someone carries them out. The houses that have turned over have been upgraded and are nicely kept up.

This is kind of a weird post. Foreclosures bring down home value because banks sell them for less than fair market values. After they are sold is when recovery happens. I’m not sure what is so hard to understand about that.

We are in the “Catch a Falling Knife” phase of the real estate market. Foreclosures will now start appearing en mass as the stock market gold real estate and oil crash all at the same time. MASSIVE ECONOMIC COLLAPSE IMMINENT.

The only really good investments are food stocks and the us dollar.

I hereby declare the real estate market dead and about to go down everywhere very very fast.

You will see how great foreclosures in your neighborhood are when the renters or should I say rip offs move in,,,,,,,,,, the jig is up.

The other side of this coin is if the neighborhood has too many pre-foreclosures where people have lived rent free for a while, average quality takes a big dip.

Depends on the hood, but the areas that dropped significantly in value have a lot of owners that threw in the towel years ago. These homes may turn around if the area has some quality that draws new residents. It’s still a gamble.

RE:David Losh @ 21 –
I agree with David. I think the key to fixing a property and reselling it is to not buy an old house where you may have to redo the plumbing, electricity, etc. Buy something that needs drywall, paint, and other designer things. The general public buys off of the feeling that a home gives them.

Tim, I have had this opinion for years. A lot of these homes are eye sores of the neighborhood. My dad and I bought a 4000sq ft duplex in your stomping ground (34th and Hoyt) in 2006. The house was a mess, if you could even see it. We made that thing look pretty good. Its probably the nicest on the block. Before that I heard there where prostitutes living there and a bullet whole or two. Every house I have bought and sold or rented, I have felt like it made the neighborhood better. I like the article!

I think what we have historically perceived to be economic “realities” has changed and will not change back. I noticed that when you and I met in person. You were dead on right. But real estate is a “market” and markets change over time based on what buyers do, whether they do what we think they should or not.

When buyers en mass value shiny objects more than land value &”good bones”, then the price of shiny objects goes up, same as gold. If no one ever wants anything else gold, and gold teeth are definitely out of style haha, then the price of gold goes down.

If people want to pay twice the price for a granite counter if it is in the house, that is their right, and that becomes “the market value” of that granite counter in the home. Not the price it cost to put it there.

This has always been true in new construction. In markets where there is no land to build a new house, this new stuff premium is becoming a reality for the resale markets.

The reality is that gold will stay shiney, and housing units get beat up.

We go into many homes that are less than five years old that need a lot of work.

On the other hand we were taking out some cabinets yesterday that were from the 1950s and they were solid wood. We can’t removed the tile because it’s set in an inch of concrete.

Then we have the issue of what is a tear down based on the economic viability. both of the community, and property.

This market is being driven by cash, and lots of it. If I had a billion in cash to invest in Real Estate I would buy Germany, Japan, or even China just as soon as things became desperate enough.

The United States was only the first wave of economic default, because we can declare bankruptcy. Our consumers came out with a ding to credit, and the ability to buy again.

Now that we have filled the banks balance sheets they would be dollars ahead to move that cash to South America, Mexico, or parts of Africa to invest.

The United States is only a safe harbor for cash. Real money will be made in emerging markets.

So, because I only have two comments left, I will say that yes, our market has changed, and people should be smarter than buying granite counter tops than a home that has economic viability.

Oh yeah, and renting is getting to be a better deal all the time considering how much debt you need to take on to buy a house.

Last is that the United States has one residential housing unit for every two people in the United States, and we are building more. The cycle to put an apartment building in service is three years, we started building in 2009, 2010, those units are becoming available now, and we have more in production.

All economic indicators that I look at say we are over supplied in residential housing units, so where is the panic buying coming from? Banks, who now control the market place.

David and Ardell are both right.
Ardell is right in that market value is determined by what people are willing and able to pay.
David is right in that the economic fundamentals don’t justify the current overheated market.
And that the construction materials in the old days were built to last. Today’s construction materials are built to look nice and wear out quickly.
Ardell said that economic realities are not a constant over time. That’s very true. Things don’t stay the same, but people think they do. Inventory is brutally low right now, so people think that they’ll never be able to buy a house unless they get one now. It doesn’t make a lot of sense, but the real estate industry and the news media is great at manipulating people’s primitive urges. Over the long term, I think the real estate market reverts to reflecting economic reality. Over the short term, not much at all, and now is one of those times.
Speaking of foreclosures, and I wish I could find the link, but in a lot of cases banks have offered money to get people to leave their foreclosed on and short sale homes, and according to the article I read, people are receiving checks from the bank that bounce

I’m not a big fan of bringing Japan into the room in a Seattle real estate conversation, but I hear that in Japan people ONLY want NEW and it is near impossible to sell a “used house”.

Perhaps the American Way of building to last will change, and did somewhat in the early 90’s. From David’s comment: “We can’t remove the tile because it’s set in an inch of concrete.”

The trend changed in 1993 or so to not using anything of color that would last a long time and be hard to remove in homes. The earth toned pea green and chocolate brown tile has all been replaced with shiny objects that are more neutral.

The expectation that a kitchen and bath will be remodeled every 8 to 12 years is built into today’s “economic reality”. Any talk otherwise is like grandpa saying” Well, when I was a kid we knew the value of…x”.

We have rehabbed lots of houses, and a few years ago I would argue for keeping the old houses.

Today I am much more inclined to say tear a house down, and build a new one in its place. I’m also a bigger fan of condos, apartments, and apartment complexes. My niece, and a good friend are apartment complex managers. They have great amenities, like a pool, sauna, billiards, movie lounge, open spaces for bar b ques, and play grounds for the kids.

South Lake Union, as much as I disliked the idea of all that development, has turned out to be a great place, especially on summer evenings, it’s vibrant.

You are right, that in terms of a new construction, if built, and finished well, you can tear out the old, throw it away, and have new, with little fuss. They even make components fully recyclable.

In terms of my thinking, yes, the realities have changed, but that is just my opinion, which might change if some one convinces me.